Directions Chapter 12 HOMEWORK Please try your best on these answers. The more y
ID: 2656355 • Letter: D
Question
Directions Chapter 12 HOMEWORK Please try your best on these answers. The more you work on these the better off you will be for the test! I have created a PowerPoint as guides to try to get you through these questions. different but the processes the same The numbers will be The answers and solutions will be shared on, April 18th. If the answer is a whole dollar number, please report the answer in currency format, with commas and no decimals (example S10,000). If the number is negative please express it as (S10,000). If the answer is a percent- then please express it with the percentage sign and rounded-up to one- decimal. For example, if you got 7.89 as a percent-you would need to express it as 7.9%. If you got negative 7.89% you would need to express it as (7.9%). . Medical Corporation of America (MCA) has a current stock price of S36, and its last dividend (D) was $2.40. In view of MCA's strong financial position, its required rate of return is 12%. If MCA's dividends are expected to grow at a constant rate in the future, what is the firm's expected stock price in five years? 2. A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of S2 per share The dividend is expected to grow at a constant rate of 5% per year. The stock's required rate of return is 12%. What is the expected dollar dividend at the end of three years? 3. A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of $2 per share. The dividend is expected to grow at a constant rate of 5% per year The stock's required rate of return is 12%. What would be a pricefor this stock? 4. A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of S2 per share. The dividend is expected to grow at a constant rate of 5% per year. The stock's price is $30 a share. The stock's required rate of return is 12%-What is the expected capital gains yield at the end of the third year? 5. A broker offers to sell you shares of Bay Area Healthcare, which just paid a dividend of S2 per share. The stock's price is $30 a share. The dividend is expected to grow at a constant rate of 5% per year. The stock's required rate of return is 12% What is the expected lotal return vield (this is the expected dividend yield+expected capital gains yield) for each of the next three years?Explanation / Answer
1. Current Stock Price = $36. Last Dividend (D0)=$2.40; Required rate of return (K)=12% Dividend expected to grow at constant rate in the future.
As per Gordon Growth model, share price can be determined with last dividend paid, required rate of return and constant growth.
Price (P) = Dividend (D)/[Reqd. rate of return (k) – Constant Growth (g)]
Therefore,
36 = 2.4 / (12% - g) => g = 5.3%
To find out expected stock price in 5 years, divided at the 4thyear should be calculated.
Therefore, D4 = 2.4 * (1 + 5.3%)^5 = $3.1
Expected stock price in 5 years = 3.1 / (12% - 5.3%) = $46.7
2. Dividend paid (D0) = $2
Constant growth rate = 5%
Required rate of return (k) = 12%
Expected dollar dividend at the end of 3 years = Last dividend paid * (1 + constant growth rate) ^ no. of years
Expected dollar dividend at the end of 3 years = 2 * (1 + 5%)^3 = $ 2.3
3. Dividend last paid (D0) = $2
Constant growth rate = 5%
Required rate of return (k) = 12%
Expected dollar dividend at the end of 3 years = Last dividend paid * (1 + constant growth rate) ^ no. of years
Expected dollar dividend at the end of 3 years = 2 * (1 + 5%)^3 = $ 2.3
Dividend paid, required rate of return and constant growth.
Price (P) = Dividend (D)/[Reqd. rate of return (k) – Constant Growth (g)]
Therefore,
Share price = 2.3 / (12% - 5%) = $32.9
4. Dividend paid (D0) = $2
Constant growth rate = 5%
Required rate of return (k) = 12%
Share price (P) = $30
Expected dollar dividend at the end of 3 years = Last dividend paid * (1 + constant growth rate) ^ no. of years
Expected dollar dividend at the end of 3 years = 2 * (1 + 5%)^3 = $ 2.3
Dividend paid, required rate of return and constant growth.
Price (P) = Dividend (D)/[Reqd. rate of return (k) – Constant Growth (g)]
Therefore,
Share price = 2.3 / (12% - 5%) = $33.1
Capital gain = $33.1 - $30 = $3.1
Capital Gain Yield % = 3.1 / 30 = 10.3%
5. Dividend paid (D0) = $2
Constant growth rate = 5%
Required rate of return (k) = 12%
Share price (P) = $30
Expected dollar dividend at the end of 3 years = Last dividend paid * (1 + constant growth rate) ^ no. of years
Expected dollar dividend at the end of 3 years = 2 * (1 + 5%)^3 = $ 2.3
Dividend paid, required rate of return and constant growth.
Dividends = D1+D2+D3 = 2 * (1 + 5%)^1 + 2 * (1 + 5%)^2 + 2 * (1 + 5%)^3 = 2.1 + 2.2 + 2.3 = $6.6
Price (P) = Dividend (D)/[Reqd. rate of return (k) – Constant Growth (g)]
Therefore,
Share price of first year = 2.1 / (12% - 5%) = $30
Share price of second year = 2.2 / (12% - 5%) = $31.5
Share price of third year = 2.3 / (12% - 5%) = $33.1
Capital gain for first year= $30 - $30 = 0
Capital gain for second year= $31.5 - $30 = $1.5
Capital gain for third year= $33.1 - $30 = $3.1
Total Yield for the first year = $2.1 + 0 = $2.1. Total yield % = 2.1/30 = 7.0%
Total yield for second year= $2.1 + $2.2 + 1.5 = $5.8 Total yield % = 5.8/30 = 19.4%
Total yield for third year = $2.1 + $2.2 + $2.3 + 3.1 = $9.7. Total yield % = 9.7/30 = 32.3%
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